Latest from GIFC

Friday, 19 September 2008

Is Mauritius Ready in The Race to Reap the Growing Islamic Capital Market?

Muniruddeen LallmahamoodPort Louis

Mauritius should focus on its infrastructure and human resources to keep pace.

Almost every nation and financial centre in the world is competing for a leading position in the growing Islamic Capital Market, but it is generally expected that each one of them will reap only a portion of it.

Slicing and sharing of the Islamic capital market pie is inevitable. According to the analyst, there were over 500 sharia's compliant funds in the world at the end of Q1 2008, and the total Islamic funds in the world could easily reach 1,000 by 2010.

The Islamic capital market is indeed an opportunity for the sustainable macroeconomic development of a nation in the long term. The direct and indirect socioeconomic development impacts are even greater. It is stated , the vision of the Mauritius financial services Commission (FSC) is "to be an internationally recognised financial supervisor committed to the sustained development of Mauritius as a sound and competitive financial services centre". But the question is, within the sphere of Islamic finance, is Mauritius ready to become a competitive Islamic financial centre?

The answer is yes, if there were to be a friendly investment environment in Mauritius. Ask the average economist in Mauritius how to lift the country into achieving that aim and it is very unlikely that he/she would reply "develop the intellectual and institutional capital". In our case, a friendly investment environment is what we need. It should include the setting up of an institutional infrastructure and the strengthening of the human resource development in the field of Islamic finance.

Africa, in general, lacks the key human resources in Islamic finance, although development in Islamic Financial Services is progressively increasing. Islamic financial institution in Africa first appeared in Eygpt & Sudan in the 1970s, they were mainly established by two individuals Prince Al Saud & Saleh Kamel, and soon after in Djibouti, Senegal and Guinea.

Following suit, South Africa also emerged after the first Islamic financial institution was created in 1989 in response to a need for a system of banking in line with Islamic economic principles, while in Gambia, the Arab Gambian Islamic Bank Ltd was established in January 1997 to contribute to the socioeconomic development of the country. Islamic finance and banking is also present in Algeria and Kenya, with both countries opening their 2nd Islamic Banks in 2007.

Currently, Barclays & HSBC Amanah are offering Islamic financial products in Kenya & Tunisia. In February 2008, Integrated Micro Finance Bank Ltd., a Nigerian Bank, officially launched a sharia's compliant division of the bank and introduced a range of interest-free products. Kenya Commercial Bank was cleared to set up an Islamic bank in Tanzania in July 2008 and the newly formed, National Islamic Bank of Uganda will begin its operations in December 2008.

It is evident that competition in the Islamic capital market in North Africa and the rest of the African continent will be tough in the coming years, given that there are key players such as the GCC, India, Chnia, and Asian Pacific countries that are expanding their financial portfolios there.

Role of the Stock Exchange of Mauritius

Here, in Mauritius to position ourselves in the Islamic capital market in the long term, institutional infrastructure like the FSC would need new regulatory measures to cover the Islamic financial industry, such as takaful (Islamic Insurance). The Stock Exchange of Mauritius (SEM) would also require to appreciate the Islamic capital market as a potential economic growth factor for the nation and eventually ensure the same degree of clarity, certainty and protection as an investor would receive in the conventional market when sharia's compliant funds become accessible here.

The SEM should also further work with other exchanges and financial authorities to allow greater cross border offering of Islamic funds. It is worth noting that the Dow Jones Islamic market index was introduced in 1999 as the first benchmark to represent Islamic-compliant portfolios in the West.

As for human resource development, there is an urgent need to reinforce our education system to produce the type of human resource that can service Islamic banking and finance. Currently, local universities and private institutions do not include Islamic financial courses and Islamic commercial laws as part of their curriculum. Licensed management companies & accounting, auditing and taxation firms in Mauritius will require the right people to better understand the Islamic fund management and the accounting treatments of Islamic banks.

Islamic finance has become a key component/module in courses in many worldwide institutions. For instance, The Chartered Institute of Management Accountants of the UK offers courses in Islamic finance & Islamic commercial laws. The Harvard Islamic Finance Information Program (HIFIP) was set up by the Havard Law School in 1995 to study Islamic finance and sharia's, one of their projects was to tap on the impact of Basel II on the future of Islamic banking.

Remarkably, in 2007, there were 200 books published in Islamic finance as compared to 40 in 2005, and 90 in 2006. This shows the growing interest in Islamic finance. One of the bestselling books was even published in Japanese.

For Mauritius therefore, over and above identifying strategic business risks (such as global financial shocks, regulatory challenges, coverage aspects, etc.), the way forward for the Islamic banking industry is to first focus on the institutional infrastructure and human resource development.